The truth about property disclosure statements

By WMFont size :

Some of the surprises homebuyers across Canada have discovered in their property after closing that were not disclosed by the seller include foundation cracks, basement flooding, mould behind the walls, water in basement, cracks in foundation. There are currently two methods available to buyers to check for hidden defects prior to completing their home purchase. The first is to make the transaction conditional on the buyer being satisfied with the results of a thorough home inspection by a reputable home inspection company. The second is to obtain a Property Condition Statement / PCS (also called a Property Condition Disclosure Statement / PCDS or just a Property Disclosure Statement / PDS or Real Estate Disclosure Form) from the seller, whereby the seller provides information as to the physical condition of their property. In Ontario, this same statement is called a Seller Property Information Statement or SPIS form.

The property condition statement has recently become the subject of many articles written by legal commentators who have taken the position that sellers should consider not completing the PCS statement because of potential liability that may result. In order to properly understand these issues, we need to first review the law as to what disclosure a seller is legally obliged to make to a buyer when selling their property.

There are two kinds of defects - patent defects and latent defects. A patent defect is a defect that is obvious when you walk into the home, for example, a broken window. The buyer cannot complain about this defect because they can easily see it when viewing the home. They are thus governed by the legal doctrine of caveat emptor or ‘buyer beware’ and have to accept these defects on closing, unless they include a clause in their agreement that the seller will repair the defect.

A latent defect, on the other hand, is a hidden defect that cannot be observed on a normal inspection. The law here is that if the seller knows about a latent defect that makes the home uninhabitable by the buyer, unfit for the buyer’s intended purpose or dangerous, then the seller must disclose this defect to the buyer. In addition, the seller cannot intentionally conceal what would otherwise be a patent defect. Examples of latent defects that should be disclosed include a problem with the foundation, an illegal basement apartment or a very serious water in basement or roof water problem that has not been repaired.

The real estate industry introduced PCSs as a means for sellers to put buyers on notice of any physical problems with the property, to alert buyers and to provide buyers with the opportunity to make further inquiries when necessary. The form is not intended to be a warranty and the buyer should still conduct their own independent investigation or property inspection. However, a PCS can help a buyer decide whether the property is something they want to continue investigating.

When completing the PCS statement, the seller is asked to respond either “yes,” “no,” “unknown” or “not applicable” to questions such as “are you aware of any water problems” or “are you aware of any structural problems.”

These PCSs have been completed by sellers for years in thousands of real estate transactions across Canada, without any liability, especially when sellers completed the statement truthfully and to the best of their knowledge. Although there is no legal requirement for a seller to complete a PCS, the fact is that in many communities across Canada when the statement was not provided, buyers were suspicious that sellers had something to hide, and thus offered less money than they otherwise would have for the property.

Yet there have also been cases where sellers who signed the PCS statement were held liable for the buyer’s damages when problems were discovered after closing. In my review of most of these decisions, the judge determined on a factual basis that the seller either knew that what they were saying was false or had deliberately concealed a defect which was found out afterwards. It was not the PCS statement that got the seller in trouble. It was about not telling the truth when completing the statement and this is why if sellers choose to complete a PCS, they should complete it to the best of their knowledge. This will not only protect sellers from liability down the road, but could also score them more money on the sale of the property.

For example, in the case of Gesner versus Ernst, which was in Nova Scotia in 2007, the seller provided a PCS form to the buyer that indicated that they had experienced water problems with the roof and had installed a new roof to try and repair the problem. The buyer did not investigate this further and it turned out after closing that the water leakage problem was much more serious and the home had to be destroyed. However, the buyer could not prove that the seller knew about any of these structural problems. The judge even commented that by answering “yes” on the PCS form about the history of water problems, the sellers had made proper disclosure and the buyer should have investigated further.

There are a few cases when sellers cannot complete the PCS form, such as when the property is rented and they have no personal knowledge about the physical condition, the seller is infirm and cannot understand the questions on the PCS form, the property is being sold by an estate trustee or by a bank under power of sale. In these instances, I’d highly recommend sellers obtain a pre-listing home inspection report from a reputable home inspection company. The seller will have the opportunity to correct any deficiencies noted on the report itself.

So what should buyers do if a seller is unable to sign a disclosure statement?
I’d advise all buyers to negotiate the price of the property, since you may likely end up having to pay for repairs down the road. Also, tread cautiously. Assure you get a thorough home inspection yourself and only then make an educated decision as to whether the property is still a good buy or not.

The bottom line for sellers is that the more complete and accurate your disclosure is, not only will the chances of you being sued virtually disappear, but you will also likely obtain a higher price for your property. For buyers, leave as little as possible to chance. Always ask for a completed PCS statement and make any transaction conditional on your being satisfied with the results of your own home inspection report.

The cost of problem solving:
Various problems often turn up in a home inspection, so it’s a good idea to keep these average costs in mind before buying.

Problem

Average cost

Damp proofing of foundation

$100-125/lin.ft +

Underpin or add foundations

$300+/lin.ft

Repair foundation crack from exterior

$1,500+

Replace beam in unfinished basement

$1,000-2,000

Foundation to roof

$125-250/sq. ft

Upgrade electrical services to 100 amp (including new breaker panel)

$1,200-1,800

Air system

$2,000-3,500

Additional roof vents

$50-75 each

Replace galvanized with copper plumbing

$1,000-3,000

Install water heater

$400-600+

Replace windows

$25-250 each

Replace deteriorated bricks

$20-30/sq. ft

Remove or open bearing wall

$2,000+

Replace bathroom exhaust fan

$300-500

Source: AmeriSpec

Be picky
Call several potential home inspection companies and ask the following questions to assure you’re hiring a qualified inspector:

Do you follow industry standards?

Are you willing to supply me with a sample report?

Are you a full-time home inspection company?

What other home services do you offer?

May I attend the inspection?

How much time will the inspection take?

When will the report be ready?

Do you perform repairs on items you inspect?

What will I receive with the inspection report?

What will be inspected?

How much will the service cost?

Do you carry errors and omissions and general liability insurance?

Do you provide an inspection agreement which defines the scope of the inspection?

Do you offer other benefits (such as repair manuals, maintenance guides, continued availability to answer questions)?

Will you provide a refund if I’m unsatisfied with your work?

When you receive sample reports, ensure they are thorough, easy to understand and narrative in format. How do they compare with reports sent by other companies? How do their fees compare with those quoted by competitors?

Remember, you get what you pay for.

Source: AmeriSpec
Mark Weisleder is a real estate lawyer, author and public speaker. Visit him online at www.markweisleder.com

Are you looking to invest in property? If you like, we can get one of our mortgage experts to tell you exactly how much you can afford to borrow, which is the best mortgage for you or how much they could save you right now if you have an existing mortgage. Click here to get help choosing the best mortgage rate